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BTP: Treatment of Business Income for Nonresident Individuals

Business Tax Policy: Treatment of Business Income for Nonresident Individuals

In determining net income, PCC 7.02.100 K and MCC 12.100 define income as “the net income arising from any business as reportable to the State of Oregon…before any allocation or apportionment…” When determining income for nonresident individuals, separate accounting is not allowed. This is consistent with the treatment of business income of nonresidents by the State of Oregon as prescribed by OAR 150-316-0169, which specifies “gross income of a nonresident…from a business, trade, profession or occupation…is determined in the same manner as is the gross income of a resident from a similar activity…”

The taxpayer will apportion net business income to determine tax liability for the Portland Business License Tax and Multnomah County Business Income Tax.

Example 1:

Sierra is a resident of California who owns one residential rental property in downtown Portland from which she receives $24,000 in gross rents, annually. The net income from the Portland property is $12,000. Sierra also owns four residential rental properties in California from which she receives $96,000 in gross rents every year. Net income from the California properties is $48,000.

(Apportionment has been rounded to the second digit for these examples. The Revenue Division generally requires that apportionment to be rounded to the sixth digit on Combined Tax Returns.)

Note: Because Sierra’s rental properties were all residential rental properties and her only source of business income was derived from residential rental properties, Sierra would qualify to be exempt from Multnomah County Business Income Tax due to renting or leasing less than 10 residential rental units.

Example 2:

Assume the same facts as in Example 1, except Sierra sells one of the California rental properties, resulting in a $50,000 gain. The gain on the sale is required to be included in net income as well as total gross receipts. The sale of the property would also disqualify Sierra from being exempt from Multnomah County Business Income Tax. Sierra’s income is now derived from residential rentals and gain from the sale of property.

Total gross receipts: $24,000 + $96,000 + $50,000 = $170,000

Net income subject to Portland Business License Tax and Multnomah County Business Income Tax: $12,000 + $48,000 + $50,000 = $110,000

Apportionment calculation: $24,000 / $170,000 = 0.14

If the sale of the California rental property had resulted in a loss, Sierra would include the loss in calculating net income. The amount to be included in apportionment is zero for the numerator and denominator in the event of a loss (as illustrated in Example 3 below).

Example 3:

Assume the same facts as in Example 2, except the sale instead resulted in a $50,000 loss.

Total gross receipts: $24,000 + $96,000 = $120,000

Net income subject to Portland Business License Tax and Multnomah County Business Income Tax: $12,000 + $48,000 + ($50,000) = $10,000

Apportionment calculation: $24,000 / $120,000 = 0.20

Example 4:

Ken lives in Washington and has an independent consulting business and reports all of his income from his consulting business on Schedule C. Total gross receipts from his consulting business is $105,000. Net income from the consulting business is $50,000. He also owns one commercial rental property in downtown Portland, from which he receives $45,000 in gross rents. The net income from his rental property in Portland is $10,000.

Aside from owning the one rental property, Ken conducts no other business activity in Portland or Multnomah County.